Fair Sky Resources Inc.
TSX VENTURE : FSK

Fair Sky Resources Inc.

April 30, 2007 15:56 ET

Fair Sky Resources Files Year End 2006 Annual Financial Statements and National Instrument 51-101 Disclosures

CALGARY, ALBERTA--(CCNMatthews - April 30, 2007) -

NOT INTENDED FOR DISSEMINATION IN THE UNITED STATES

Fair Sky Resources Inc. ("Fair Sky") (TSX VENTURE:FSK) today filed its Audited Consolidated Financial Statements for the year ended December 31, 2006 and the related Management's Discussion and Analysis, its reserves data and other oil and gas information required pursuant to National Instrument 51-101 and its Annual Report for the year ended December 31, 2006.

All of these filings can be accessed electronically on SEDAR at www.sedar.com.

2006 HIGHLIGHTS

2006 average production increased 1,176% to 217 BOE/D compared to 2005 average production of 17 BOE/D

Fair Sky drilled 16 gross wells (12.8 net) and cased 93%

Revenue increased 940% to $3,663,458 from $352,375 in fiscal 2005

2006 production increased 840 % to reach a 2006 exit rate of 440 BOE/D (with 550 net BOE/D behind pipe) compared to a 2005 exit rate of 47 BOE/D

Total proved reserves increased 136% during the year to 1.2 million BOE at December 31, 2006 while proved plus probable reserves increased 120% to 3.6 million BOE

Net present value of the total proved plus probable reserves discounted at 10% before income tax increased 166% to $75.1 million at December 31, 2006 compared to $28.2 million at December 31, 2005

Fair Sky's undeveloped land base increased in 2006 to 84,000 net acres

Reserves information is taken from the independent evaluation of Fair Sky's reserves completed by Chapman Petroleum Engineering Ltd. done effective January 1, 2007 and dated February 22, 2007 (the "Chapman Report"), detailed information from which is available in Fair Sky's National Instrument 51-101 statement of reserves data and other oil and gas information available on the SEDAR website at www.sedar.com.

The following two tables set forth the Fair Sky's reserves volumes and future net revenues as determined by the Chapman Report before tax based on forecast prices and costs.



Light and
Medium Oil Natural Gas NGL's
(MSTB) (MMscf) (Mbbl)
Reserves Category Gross Net Gross Net Gross Net
----------------------------------------------------------------------------
Proved
Developed - Producing 76 63 3,173 2,550 7 5
Developed - Non-Producing 57 55 765 665 - -
Undeveloped - - 2,461 1,726 - -
----------------------------------------------------------------------------
Total Proved 133 118 6,398 4,941 7 5
Probable 767 595 9,913 7,914 1 1
----------------------------------------------------------------------------
Total Proved Plus Probable 900 713 16,311 12,855 8 6


Net Present Value of Future Net Revenue
Discounted at
0%/Year 5%/Year 10%/Year
Reserves Category ($Millions) ($Millions) ($Millions)
----------------------------------------------------------------------------
Proved
Developed - Producing 21.3 16.9 14.1
Developed - Non-Producing 5.7 4.4 3.5
Undeveloped 12.1 9.3 7.6
----------------------------------------------------------------------------
Total Proved 39.1 30.6 25.2
Probable 86.5 63.1 49.9
----------------------------------------------------------------------------
Total Proved Plus Probable 125.6 93.7 75.1

The net present values presented above do not necessarily represent the fair
market value of the reserves.


Update of Operations

Average production during the fourth quarter of 2006 was approximately 253 BOE's/day. Oil production in the quarter declined as a result of decreased production volumes at Macleans Creek as the wells stabilized. Gas production was hindered by declines due to facility restrictions at Westrose as facility upgrades occurred in October. A new well drilled and tied-in late December at Carbondale added approximately 160 BOE/day resulting in an exit rate of 440BOE/day with 550 BOE/day behind pipe and/or choked back production.

Fair Sky has developed a large number of prospects in the three core areas held by the company. Development of these opportunities over the coming year will allow the company, along with the addition of production presently behind pipe, to show a marked increase in production and accordingly increased sales volumes.

For fiscal 2007, Fair Sky's opportunities for exploration and development include the potential for drilling or re-completing approximately 30 or more gross wells at a cost of approximately +$28 million including additional land purchases, well completions and tie-ins. The extent of execution on this program is dependent upon, among other things the weather, availability of services and equipment, initial exploration success and capital resources.

In the fourth quarter, the company saw commodity prices beginning to rise while at the same time service costs came off their peak. Both of these factors should favorably affect the economics of the company's capital spending program and we are closely monitoring them both. Management believes that the high quality of its asset base can provide a meaningful capital program that will be tailored to the natural gas and oil price environment, service cost environment and availability of finances.

Peace River Arch

In the fourth quarter of 2006, the Macleans Creek production was 70BOES/day, without producing significant water. Production is expected to stabilize at these rates based on analogous wells in the area. Also, wells in this area have shown significant longevity with many upwards of 20+ years. In the long term Fair Sky may look at enhancing recovery on the properties through water injection to increase reservoir pressure. Macleans Creek production royalty rates are subject to a royalty holiday until June, 2007.

At Boundary Lake, a pipeline route was surveyed in the fourth quarter and construction began in the first quarter of 2007. Production is scheduled to begin after break-up once all regulatory approvals for the facility are obtained by the partner. This will allow production from the previously announced gas well that was drilled and tested at 5.3 mmcf/day (FSK 60% WI). Initial production from the well is expected to be approximately 2.5mmcf/day (1.5mmcf/day net to Fair Sky) with potential production increases through 2007 as facility capacity allows. Fair Sky purchased an 100% working interest in an additional section (640 acres) to compliment the 1280 acres already obtained in the area. Additional drilling locations are being evaluated and a seismic program may be initiated in 2007.

Central Alberta

As of December 31, 2006, Fair Sky is producing approximately 2700mcf/d (net) from 7 gas wells in the Carbondale (Morinville), Willingdon (Boian) and Westrose areas with various working interests as compared to 1300mcf (net) for the third quarter. This included additional production from a new Carbondale well drilled and tied-in late December. During the fourth quarter, the company's production from its wells encountered typical declines.

At Boian, the company reached agreements, obtained regulatory and land owner consents, and constructed a separate line bypassing third party facilities to send the gas directly to a sales pipeline. The new line was placed in operation in January of 2007 and additional production will be added as work-over work on the existing well is completed.

In the Carbondale area, the company continues to develop potential drilling locations and acquire additional land. A new 100% working interest gas well was drilled and tied in late December at Carbondale which added approximately 160 BOE/day. Several new well locations are in the process of being licensed, including an exploratory Leduc reef well forecast to be drilled in second quarter 2007. Several additional drilling locations are being identified for future drilling.

At Westrose, the company continued to produce from its Glaucanite and Colony gas wells. Downtime due to facility maintenance and normal well work over operations reduced average production in the quarter. Regulatory approval for Glaucanitic downspacing for drilling locations is being addressed is expected in fiscal 2007.

On Fair Sky's Swan Hills Edge play an additional section was acquired (FSK 33.3% WI) to expand the existing jointly owned acreage to 3200 acres of land on trend with an existing oil and gas field near Grande Prairie, Alberta. Analogous pools in the area have produced in excess of 45 million barrels of oil and gas. Purchased seismic data was interpreted in the fourth quarter and a geophysical program was initiated in 2007 to record additional data to identify prospect locations and produce drilling locations for late 2007.

Central Saskatchewan

In December, 2006 and January, 2007, Fair Sky drilled and cased four additional wells to make a total of five wells now drilled and cased in the Moose Jaw area of Central Saskatchewan. The wells have all encountered significant gas shows while drilling and log analysis indicated shallow gas in the Belly River and Manville zone and deeper oil in the Bakken zone. The company began its completion program on the wells but activity was halted due to break-up and road bans. Depending on completion results a significant exploration and development program is anticipated for 2007.

Utah (Uranium) Property

During the fourth quarter, Fair Sky Resources Inc. completed the transfer of its 100% interest in a mineral property in Southern Utah USA to Fair Sky Minerals Inc. ("Minerals") a wholly owned subsidiary of Fair Sky Resources.

An airborne geophysical survey including airborne radiometrics, Electric Magnetic Survey and Magnetic Coverage over its energy property in Southern Utah was completed. The survey identified a uranium anomaly on property owned 100 % by Fair Sky Minerals Inc.

It is the intent of the company to dispose of Minerals in order to crystallize its value in the entity and focus 100% of management's efforts on the oil and gas company.

The full text of the Audited Consolidated Financial Statements and the associated Management's Discussion and Analysis is set forth below.

Form 51-102F1

Management Discussion and Analysis

Fair Sky Resources Inc.

For the year ended December 31, 2006

The following management's discussion and analysis ("MD&A") is dated April 26, 2007 and has been prepared by management in accordance with Canadian generally accepted accounting principles (GAAP) and should be read in conjunction with the Annual Audited Consolidated Financial Statements of Fair Sky Resources Inc. ("Fair Sky" or the "company") for the year ended December 31, 2006 and Fair Sky's statement of reserves data and other oil and gas information, both available on the SEDAR website at www.sedar.com.

This MD&A refers to operating netback which is not a recognized measure under GAAP. Management believes that in addition to net income (loss) and cash flow from operating activities, operating netback is a useful supplemental measure as it demonstrates the company's ability to generate the cash necessary to repay debt or fund future growth through capital investment. Investors are cautioned, however, that this measure should not be construed as an alternative to net income determined in accordance with GAAP as an indication of Fair Sky's performance. Fair Sky's method of calculating this measure may differ from the method used by other companies and, accordingly, this measure may not be comparable to measures used by other companies.

ADVISORY: Natural gas volumes have been converted to barrels ("bbl") of oil equivalent ("boe") using six thousand cubic feet ("mcf") of natural gas equal to one boe. This conversion conforms to NI51-101. Use of the term boe may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Forward-Looking Information

Certain statements contained in this MD & A constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fair Sky to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risk, uncertainties and assumptions include, among other things: general economic and business conditions; changing foreign exchange rates; the receipt of required regulatory approvals; the availability of sufficient capital; the estimated cost and availability of funding for the continued exploration and development of Fair Sky's prospects; political and economic conditions; and commodity prices.

Overview

The company is a Canadian based oil and gas energy company primarily engaged in an active capital program to develop oil & gas reserves. The company began operations in early 2004 and became a public company in March 2006, trading on the TSX Venture Exchange under the symbol "FSK".

Fair Sky's oil and natural gas operations are situated in Northwestern and Central Alberta and Central Saskatchewan. Activities are currently focused in the Boundary Lake and Valleyview areas of Northwest Alberta, Carbondale area of Central Alberta and Central Saskatchewan. The Corporation currently has producing operations as well as active exploration and development programs and prospect inventories with exposure to approximately 150,000 acres (107,000 net to the company) of developed and undeveloped lands. The company also has a 100% interest in approximately 25 sections of a potential uranium property in Southern Utah, USA.

Selected Annual and Quarterly Information

Unless otherwise noted, all currency amounts are stated in Canadian dollars.

The following tables summarize selected financial data for the company for 2006 and the year ending December 31, 2005. A quarterly breakdown for 2005 would not be meaningful as the company had minimal operations during that year.



Quarter Ended Quarter Ended Quarter Ended Quarter Ended
December 31, September 30, June 30, March 31,
2006 2006 2006 2006
----------------------------------------------------------------------------
Total Revenues $ 880,106 $ 1,126,587 $ 910,342 $ 185,224
Expenses $ 1,977,874 $ 1,325,522 $ 689,558 $ 377,381
Net income (loss) $ (710,378) $ (198,935) $ 220,785 $ (192,158)
Net income (loss)
per share - Basic $ (0.06) $ (0.02) $ 0.02 $ (0.02)
Net income (loss)
per share -
Diluted $ (0.06) $ (0.02) $ 0.02 $ (0.02)
Total Assets $30,694,749 $26,710,772 $26,748,440 $18,104,494

Total short term
liabilities $ 8,351,871 $ 8,984,526 $ 8,862,292 $ 4,802,164


Year Ended Year Ended
December 31, December 31,
2006 2005
----------------------------------------------------------------------------
Total Revenues $ 3,102,259 $ 330,582
Expenses $ 4,370,335 $ 896,870
Net income (loss) $ (880,686) $ (566,289)
Net income (loss)
per share - Basic (0.08) $ (0.10)
Net income (loss)
per share -
Diluted $ (0.08) $ (0.10)
Total Assets $30,694,749 $14,257,028

Total short term
liabilities $ 8,351,871 $ 1,806,542


In the fourth quarter, Fair Sky showed a decrease in total revenues due to a decrease in production at Macleans Creek as the wells stabilized after initial flush production. As well, the partner at Westrose carried out facility upgrades over the month of October and sales showed a decline due to softening in prices. One new well was drilled and tied in at Carbondale in late December with initial production of 1000mcf/d (100% FSK WI).

Total Assets increased by approximately $4,000,000 in the quarter as a result of the company's drilling program. Five wells were drilled and cased in the month of December along with one completion and tie in.



Capital Expenditures

The following summarized Fair Sky's capital expenditure program for 2006:

Year Ended Year Ended
December 31, December 31,
($000's) 2006 2005
----------------------------------------------------------------------------
Land acquisitions and retentions 2,435 1,701
Seismic 1,678 804
Drilling & completions 14,579 3,149
Equipping, tie-ins and facilities 3,007 839
Capitalized G&A 244
----------------------------------------------------------------------------
Total 21,943 6,495


As a recent start-up, Fair Sky had minimal operations at the end of fiscal 2005. As such, the company showed a substantial increase in revenue and operations in fiscal 2006. Specifically, the company drilled a total of 16 wells (12.8 net to the company) during the year and increased its land base to 107,000 net acres as the company began to execute on its long term business plan.



Results of Operations

Oil & gas sales

Quarter Ended Quarter Ended Quarter Ended Quarter Ended
December 31, September 30, June 30, March 31,
2006 2006 2006 2006
----------------------------------------------------------------------------
Oil sales (BOE) 5,913 11,295 2,391 517

Gas sales (Mcf) 89,698 99,997 111,506 16,282

NGL sales (BOE) 2,452 2,212 790 564

Total BOE (6:1) 23,315 30,173 21,765 3,795

Average BOE/day 253 328 239 42

Oil sales $363,688 $738,058 $169,078 $ 28,880

Gas sales $625,641 $524,610 $776,854 $127,465

NGL sales $105,425 $129,398 $ 44,619 $ 29,742


Year Ended Year Ended
December 31, December 31,
2006 2005
----------------------------------------------------------------------------
Oil sales (BOE) 20,116 1,366

Gas sales (Mcf) 317,483 29,799

NGL sales (BOE) 6,018 nil

Total BOE (6:1) 79,048 6,332

Average BOE/day 217 17

Oil sales $1,299,704 $ 61,036

Gas sales $2,054,570 $291,339

NGL sales $ 309,184 nil


Sales of oil decreased in the fourth quarter based on decreased production volumes at Macleans Creek as the wells stabilized. Gas sales were hindered by declines in prices and facility restrictions at Westrose due to facility upgrades in October. Fourth quarter production averaged 253 BOE/day compared to 328 BOE/day in the third quarter. A new well was drilled and tied-in late December at Carbondale which added approximately 160 BOE/day resulting in an exit rate of 520 BOE/day gross (440BOE/day net) with approximately 550 net BOE/day behind pipe and/or choked back production, a significant percentage of which is from the Boundary Lake area.

Sales of oil and gas increased substantially over fiscal 2005 as Fair Sky's first significant producing asset only came online in the fourth quarter of 2005. During 2006, the company brought 2 (100% WI) oil wells and 3 gross (2.6 net) gas wells on production. At year end, these wells were producing 440 net BOE/day for the company compared to the fiscal 2005 exit rate of 48 net BOE/day.

Oil prices averaged $61.48/bbl for the fourth quarter of 2006 and $64.58 for fiscal 2006 compared to $44.74 for fiscal 2005. Gas sold for $ 6.94 for the fourth quarter of 2006 and $6.43 for fiscal 2006 compared to $9.64 for fiscal 2005. Natural gas liquids prices were $42.97 for the fourth quarter and $51.35 for fiscal 2006.



Royalties and operating expenses:

Quarter Ended Quarter Ended Quarter Ended Quarter Ended
December 31, September 30, June 30, March 31,
2006 2006 2006 2006
----------------------------------------------------------------------------
Royalties $209,593 $272,326 $ 82,785 $21,521

Royalties/BOE $ 8.99 $ 9.03 $ 3.80 $ 5.67

Royalty rate 19.1% 19.6% 8.4% 11.6%

Operating expenses $334,899 $430,804 $155,761 $47,941

Operating
expenses/BOE $ 14.36 $ 14.28 $ 7.07 $ 12.51

Operating net
back/BOE $ 23.60 $ 30.59 $ 34.15 $ 30.44


Year Ended Year Ended
December 31, December 31,
2006 2005
----------------------------------------------------------------------------
Royalties $586,225 $ 42,025

Royalties/BOE $ 7.42 $ 6.64

Royalty rate 12.9% 12.7%

Operating expenses $969,405 $102,794

Operating
expenses/BOE $ 12.26 $ 16.06

Operating net
back/BOE $ 26.67 $ 30.51


For both the quarter and the year, operating net back per BOE declined
primarily due to decreased commodity prices.


General & administrative ("G&A") expenses

Quarter Ended Quarter Ended Quarter Ended Quarter Ended
December 31, September 30, June 30, March 31,
2006 2006 2006 2006
----------------------------------------------------------------------------
G&A expenses $550,248 $313,544 $247,646 $232,010

G&A/BOE $ 23.60 $ 9.04 $ 11.38 $ 61.14


Year Ended Year Ended
December 31, December 31,
2006 2005
----------------------------------------------------------------------------
G&A expenses $1,343,448 $571,168

G&A/BOE $ 17.00 $ 90.20


The components of G&A are as follows:

Year Ended Year Ended
December 31, December 31,
($000's) 2006 2005
----------------------------------------------------------------------------
Salaries, benefits and consultants 700 285
Other 1,240 412
----------------------------------------------------------------------------
G&A expense, gross 1,940 697
Overhead recoveries (353) (126)
Capitalized G&A (244)
----------------------------------------------------------------------------
G&A expense, net 1,343 571


G&A rose due to a number of minor issues during the fourth quarter. Costs related to yearly expenses previously not accrued were recorded related to listing fees and the audit fees. Approximately $50,000 was expensed from current assets after a review of the balances by the new accounting team. Expenses also increased as a result of the increased investment the company made in staffing during the quarter. With the recent additions, management believes the company has the foundation in place to develop the large productive land base now held in three key areas of Western Canada and execute on its business strategy. Going forward, per BOE G&A costs should decline as the G&A cost increases required to support future production growth should be minimal.

Liquidity & capital resources

As of December 31, 2006, the company had a net bank indebtedness of $3,905,081 compared to $3,937,547 at September 30, 2006 and a cash balance of $6,286,936 at December 31, 2005. Working capital deficiency, including bank indebtedness, was $6,039,459 at the end of December 2006. The working capital deficiency is a function of the high number of wells drilled in December and is supported by the company's $7,200,000 credit facility.

As a small exploration oil and gas company, Fair Sky continues to require greater funds than its operations can provide to fully exploit its inventory of opportunities. As such, the company intends to address further capital needs through further financings from the capital markets, positive cash flow from operations, increased credit facilities and recurring reviews of non-core properties for potential disposal. The extent to which the company can execute on its business plan in fiscal 2007 will be dependent on the level of funding that can be raised during the year.

On April 11, 2007, the company announced the offering for a private placement of 2,500,000 shares on a flow-through basis at a price of $2.05 per share for gross proceeds of $5,125,000. On April 17, 2007 the company closed on the first $2,999,969 of the offering and efforts continue to market the rest of the offering.

At December 31, 2006 the company had various tax pools totalling $19.4 million available for use in future years to reduce taxable income.

Commitments

Under the terms of flow-through share agreements entered into in 2006, the company is committed to spend $3,643,518 on expenditures qualifying as Canadian exploration expenditures before December 31, 2007.

Outstanding Shares

As at April 26, 2007, our outstanding shares were 14,737,788.

Financial Instruments and Other Instruments

Fair Sky's financial instruments consist of cash, accounts receivable and accounts payable. Unless otherwise noted, it is management's opinion that Fair Sky is not exposed to significant interest, currency or credit risks arising from these financial instruments. The fair value of these financial instruments approximates their carrying value due to their short-term maturity and capacity for prompt liquidation.

Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to management, including the CEO and CFO, on a timely basis so that appropriate decisions can be made regarding public disclosure. Management, with the participation of the certifying officers, has evaluated the effectiveness of the design and operation, as of December 31, 2006, of the Company's disclosure controls and procedures (as defined by the Canadian Securities Administrators). Based on that evaluation, the certifying officers have concluded that such disclosure controls and procedures are effective and designed to provide reasonable assurance that material information relating to the Company and its subsidiaries is made known to them by others within those entities.

Internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of our financial reporting and compliance with Canadian generally accepted accounting principles in our financial statements. Management has evaluated the design of internal controls over financial reporting and has concluded that such internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in Canada. In addition, there have been no changes in the Company's internal control over financial reporting during the year ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Approval

The board of directors of Fair Sky has approved the disclosure contained in this Quarterly MD & A. A copy of this MD & A will be provided to anyone who requests it.

Additional Information

Additional information relating to Fair Sky is on SEDAR at www.sedar.com.


Consolidated Financial Statements of

Fair Sky Resources Inc.

For the year ended December 31, 2006 (audited)



Fair Sky Resources Inc.
Consolidated Balance Sheets
(Audited)

As at December 31, 2006 and 2005 2006 2005
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$ $

Assets

Current assets
Cash and short-term investments - 6,286,936
Accounts receivable 2,262,940 980,105
Prepaid expenses and deposits 49,472 60,217
--------------- -------------
2,312,412 7,327,258

Property, plant and equipment (note 3) 28,382,337 6,929,770
--------------- -------------
30,694,749 14,257,028
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Liabilities

Current liabilities
Bank indebtedness (note 4) 3,905,081 -
Accounts payable and accrued liabilities 4,446,790 1,806,542
--------------- -------------
8,351,871 1,806,542
--------------- -------------

Asset retirement obligation (note 5) 441,909 205,662
Future income taxes (note 9) 1,732,613 283,000
--------------- -------------

Share capital (note 6) 21,535,473 12,559,601
Contributed surplus 414,173 302,827
Deficit (1,781,290) (900,604)
--------------- -------------
20,168,356 11,961,824
--------------- -------------
30,694,749 14,257,028
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments (note 8)
See accompanying notes

Approved by the Board of Directors

Director Director


Fair Sky Resources Inc.
Consolidated Statement of Operations and Deficit

2006 2005
For the years ended December 31, 2006 and 2005 $ $
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Revenue
Oil & gas sales 3,663,457 352,375
Royalty expense (586,225) (42,025)
Interest income 25,027 20,232
--------------- -------------
3,102,259 330,582
--------------- -------------

Expenses
Production 1,017,180 102,794
General and administrative 1,343,448 571,168
Depletion, depreciation and accretion 1,794,721 97,629
Interest 77,114 -
Stock based compensation 137,872 125,280
--------------- -------------
4,370,335 896,871
--------------- -------------

Loss before tax (1,268,076) (566,289)
Income taxes (note 9)
Current - -
Future (387,390) -
--------------- -------------
(387,390) -
--------------- -------------
Loss for the year (880,686) (566,289)

Deficit, beginning of period (900,604) (334,315)
--------------- -------------

Deficit, end of period (1,781,290) (900,604)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Loss per common share (note 10)
Basic (0.08) (0.10)
Diluted (0.08) (0.10)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes



Fair Sky Resources Inc.
Consolidated Statement of Cash Flows


2006 2005
For the years ended December 31, 2006 and 2005 $ $
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash provided by (used in)

Operating activities
Loss for the period (880,686) (566,289)
Items not involving cash
Depletion, amortization and accretion 1,794,721 97,629
Stock based compensation 137,872 125,280
Future income taxes (387,390)
--------------- -------------
Cash flow from operations 664,517 (343,380)

Net change in non-cash working capital 1,398,480 169,825
--------------- -------------
2,062,997 (173,555)
--------------- -------------


Investing activities
Purchase of property, plant and equipment (23,011,041) (5,345,050)
--------------- -------------
(23,011,041) (5,345,050)
--------------- -------------

Financing activities
Issuance of capital stock (note 6) 10,086,219 10,742,264
Issuance of shares on acquisition of
Primax Capital Corp. (note 11) 669,808 -
--------------- -------------
10,756,027 10,742,264
--------------- -------------

Increase (decrease) in cash and
short-term investments (10,192,017) 5,223,659

Cash and short-term investments
- Beginning of year 6,286,936 1,063,277

(Bank indebtedness) cash and short-term
investments - End of year (3,905,081) 6,286,936
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes

Interest Paid 77,114 97
Taxes Paid - -


Note 1 - Nature of Operations

Fair Sky Resources Inc. (the "company") commenced operations in 2004. The company's principal business activities include the evaluation, acquisition, exploration and development of oil and gas properties in Western Canada.

Note 2 - Significant Accounting Policies

a) Property and equipment

i. Petroleum and natural gas properties and production equipment

The company follows the Canadian accounting standards guideline on full cost accounting for its petroleum and gas operations, whereby all costs associated with the acquisition of, exploration for and the development of petroleum and natural gas reserves, including asset retirement costs, are capitalized and accumulated in a single Canadian cost centre. Such costs include lease acquisition, drilling, geological and geophysical expenditures, lease rentals on non-producing properties, equipment costs and overhead expenses directly related to exploration and development activities.

Proceeds from the disposition of petroleum and natural gas properties are accounted for as a reduction of capitalized costs, with no gain or loss recognized, unless such disposition would alter the rate of depletion and depreciation by 20% or more.

ii. Depletion and depreciation

Depletion and depreciation of petroleum and natural gas properties is calculated using the unit of production method based upon production volumes, before royalties, in relation to total proved petroleum and natural gas reserves, as estimated by independent engineers. In determining costs subject to depletion, the Company includes estimated future costs to be incurred in developing proved reserves and excludes estimated salvage values. The cost of undeveloped properties are excluded from costs subject to depletion until it is determined that proved reserves are attributable to the property or impairment has occurred. For depletion and depreciation purposes, natural gas volumes are converted to equivalent oil volumes based upon a relative energy content of six thousand cubic feet of natural gas to one barrel of oil.

iii. Mineral property interests

Direct costs relating to the acquisition, exploration and development of mineral properties, including interest on borrowings directly related to a property, are capitalized on an area of interest basis. When the company is the operator of a project and incurs costs on behalf of joint venture partners, these costs are periodically charged back to the partners and are recorded as operator recoveries. Operator recoveries are credited to exploration costs. Cumulative expenditures will be charged against income, through unit-of-production depletion, when properties are developed to the stage of commercial production. Where the company's exploration commitments for an area of interest are performed under option agreements with a third party, the proceeds of any option payments under such agreements are applied to the area of interest to the extent of costs incurred. The excess, if any, is credited to operations. If an area of interest is abandoned or management determines there is a permanent and significant decline in value, the related costs are charged to operations.



Office equipment is stated at cost. Depreciation is provided using the
straight-line method over the estimated useful life of the asset as follows:

iv. Office equipment

Furniture 5 years
Office equipment 5 years
Computer hardware 3 years
Leasehold improvements over the lease term


v. Ceiling test

Under the full cost method of accounting, a "ceiling test" is performed to recognize and measure impairment, if any, of the carrying amount of petroleum and natural gas properties. Impairment is recognized if the carrying amount of petroleum and natural gas properties, less the cost of undeveloped properties not subject to depletion, exceeds the estimated undiscounted future cash flows from the Company's proved reserves. The future cash flows are based on a forecast of prices and costs, as provided by an independent third party. If recognized, the magnitude of the impairment is then measured by comparing the adjusted carrying amount to the estimated discounted future cash flows from the company's proved and probable reserves. The future cash flows are discounted at the risk-free interest rate, using forecasted prices and costs, and are exclusive of indirect costs such as interest charges, general and administrative expenses and future income taxes.

vi. Mineral properties

An independent valuation is performed to recognize and measure impairment, if any, of the carrying amount of mineral properties. Impairment is recognized if the carrying amount of properties exceeds the estimated value of the properties.

b) Asset retirement obligations

The fair value of estimated asset retirement obligations ("ARO") is recognized in the financial statements in the period in which they are identified and a reasonable estimate of fair value can be made. The ARO includes the costs of abandonment of petroleum and natural gas wells, dismantling and removing tangible equipment, and returning land to its original condition. The asset retirement cost, equal to the estimated fair value of the asset retirement obligation, is capitalized as part of the cost of the related long-lived asset. Asset retirement costs for petroleum and natural gas assets are amortized using the unit of production method and are included in the depletion, depreciation and amortization on the statement of operations.

Increases in the asset retirement obligation resulting from the passage of time are recorded as accretion expense on the statement of operations. Any revisions to the original estimate of cost or the timing of the cash outflows may result in a charge to the ARO. Actual expenditures incurred to abandon petroleum and natural gas properties reduce the ARO liability.

c) Joint operations

Substantially all of the company's exploration, development and production activities are conducted jointly with others. These financial statements reflect only the company's proportionate interest in such activities.

d) Cash and cash equivalents

Cash and cash equivalents include cash on hand, balances with banks and short-term deposits with original maturities of less than three months.

e) Flow-through equity instruments

The resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to shareholders. To recognize the foregone tax benefits to the company, the carrying value of the shares issued is reduced by the tax effect of the tax benefits renounced to subscribers. The tax effect is recorded on the date that the renouncement forms are filed with the taxation authorities.

f) Stock-based compensation

The company follows the fair value method of accounting for stock options granted to directors, officers, employees and consultants. Fair value is determined at the grant date using the Black-Scholes option pricing model. The value attributed to options is recognized over the vesting period as stock based compensation expense with a corresponding credit to contributed surplus. The contributed surplus balance is reduced as the options are exercised with the amount initially recorded being credited to share capital.

g) Revenue recognition

Revenue from petroleum and natural gas is recognized based on volumes delivered to customers at contractual delivery points and rates. The costs associated with the delivery, including operating transportation, and production based royalties are recognized in the same period in which the related revenue is earned.

h) Income taxes

The company follows the liability method of accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and measured using the substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect on future tax assets and liabilities of a change in tax rates is recognized in earnings in the period in which the change becomes substantively enacted. A valuation allowance is recorded against any future income tax asset if the company is not "more likely than not" to be able to utilize the tax deductions associated with the future income tax asset.

i) Per share amounts

Basic earnings per common share are computed by dividing earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted per share amounts reflect potential dilution that could occur if securities or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method of calculating diluted per share amounts is used whereby any proceeds received from the exercise of in-the-money stock options or warrants are assumed to be used to purchase common shares of the company at the average market price during the year.

j) Measurement uncertainty

The timely preparation of financial statements in conformity with Canadian generally accepted accounting principles requires that management make estimates that affect the amounts of assets, liabilities, revenues and expenses as they primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, actual results could differ from those estimated.

Specifically, the amounts recorded for depletion, depreciation and amortization of petroleum and natural gas properties, the provision for asset retirement obligation costs, the ceiling test calculation and the tax provision are based on estimates of proved reserves, production rates, commodity prices, future costs and other relevant assumptions. The amounts recorded relating to fair values of stock options are based on estimates of future volatility of the company's share price, expected lives of the options, expected dividends to be paid by the company, and other relevant assumptions. By their nature, these estimates are subject to measurement uncertainty and the effect on the financial statements of changes in such estimates in future periods could be significant.



Note 3 - Property, Plant and Equipment

2006
---------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
$ $ $
Petroleum and natural gas properties 28,915,030 1,877,172 27,037,858
Mineral property interests 1,232,946 - 1,232,946
Office equipment 134,372 22,839 111,533
---------------------------------------

30,282,348 1,900,011 28,382,337
---------------------------------------
---------------------------------------

2005
---------------------------------------
Accumulated
depletion and Net book
Cost depreciation value
$ $ $
Petroleum and natural gas properties 6,586,973 94,481 6,492,492
Mineral property interests 417,782 - 417,782
Office equipment 24,813 5,317 19,496
---------------------------------------

7,029,568 99,798 6,929,770
---------------------------------------
---------------------------------------


During the year ended December 31, 2006, the company capitalized general and administrative expenses in the amount of $244,284 (2005 - $Nil) related to exploration and development expenditures.

As at December 31, 2006, costs totaling $1,232,946 related to mineral property interests have been excluded from assets subject to depletion, while estimated future development costs of $390,000 (2005 - $276,000) related to proven reserves, were included in the calculation of depletion expense.

In 2005, the company acquired an interest in certain mineral claims in Iron County of the State of Utah. The company incurred additional mineral property expenditures of $815,164 for the year ended December 31, 2006 consisting of additional mineral claim costs and geological and geophysical expenditures.

The company performed a ceiling test calculation at December 31, 2006 to assess recoverable value of property and equipment. The oil and gas prices used in the calculation are based on the benchmark commodity price forecast of our independent reserve evaluators in the January 1, 2007 reserve report as follows:



----------------------------------------------------------------------------
Alberta Par AECO
Crude Natural
CDN$/bbl Gas
Year CDN$/Mcf
----------------------------------------------------------------------------
2007 70.09 7.50
2008 67.82 8.00
2009 66.68 7.75
2010 64.41 7.65
2011 63.27 7.80
Thereafter (inflation %) 2% / yr 2% / yr


Based on these assumptions, the undiscounted value of future net revenues from the company's proved reserves exceeded the carrying value of property and equipment as at December 31, 2006.

Note 4 - Bank Indebtedness

The company maintains an operating credit facility. The maximum amount available under the facility is $7,200,000 and facility bears interest at prime plus one eighth of one percent. Security on the credit facility is a minimum amount of $10,000,000 over the Dedicated Lands as reported in the reserve report.

Note 5 - Asset Retirement Obligations

The company's asset retirement obligations result from net ownership interests in petroleum and natural gas assets including well sites. The company estimates the total discounted amount of the cash flows required to settle its asset retirement obligations is approximately $441,909 (2005 - $205,662) which has been discounted using a credit adjusted risk free rate of 6.125% (2005 -- 6.25%) . An inflation factor of 1.5% has been applied to estimated asset retirement costs. The undiscounted value of the obligations is approximately $833,491 (2005 - $367,739). These obligations are to be settled based on the economic lives of the underlying assets, which currently extend up to 16 years into the future and will be funded from general corporate resources at the time of abandonment.



A reconciliation of the asset retirement obligations is provided below:

December 31, December 31,
2006 2005
-----------------------------
-----------------------------

Balance, beginning of year $ 205,662 $ 64,500

Liabilities incurred 241,739 137,888
Accretion expense (5,492) 3,274
-----------------------------

Balance, end of year $ 441,909 $ 205,662
-----------------------------
-----------------------------

Note 6 - Share Capital

a) Authorized:

Unlimited number of common voting shares without nominal or par value
Unlimited number of preferred shares without nominal or par value

b) Issued common shares:

Number Amount
--------------------------
--------------------------

Balance, December 31, 2004 4,035,899 $ 1,370,476

Issued for cash 2,876,200 4,019,975
Issued for cash pursuant to flow through share
private placement 2,058,796 7,205,786
Issued on exercise of stock options 55,000 42,500
Fair value transfer on exercise of stock options - 22,453
Issued on exercise of warrants 165,530 165,530
Fair value transfer on exercise of warrants - 41,380
Issued for mineral property interests 114,000 192,028
Share issue costs, net of tax effect - (459,527)
Tax effect of flow-through expenditures renounced - (41,000)
--------------------------

Balance, December 31, 2005 9,305,425 $12,559,601

Issued as part of commitment to list 181,229 -
Issued for cash 126,000 361,010
Issued on acquisition of Primax Capital Corp. 505,000 700,131
Issued on exercise of stock options 163,595 161,462
Fair value transfer on exercise of stock options - 26,526
Issued for cash pursuant to flow through share
private placement 2,993,139 9,997,891
Share issue costs, net of tax effect - (318,610)
Tax effect of flow-through expenditures renounced - (1,952,538)
--------------------------
Balance, December 31, 2006 13,274,388 $21,535,473
--------------------------
--------------------------


c) Share capital transactions during the year ended December 31, 2006:

i. In January 2006 the company completed various private placements of 75,917 common shares at an average price of $3.20 per share for gross proceeds of $242,750.

ii. In the first quarter of 2006 181,229 common shares of Fair Sky were issued without proceeds to meet an obligation for failure to list the company by December 31, 2005. This obligation arose from a financing arrangement for the issuance of common shares in March 2005.

iii. In March 2006 the company issued 505,000 common shares for the acquisition of Primax Capital Corp.

iv. Throughout the year, the company issued 163,595 common shares on exercise of stock options at $0.50 to $1.25 per share for total cash proceeds of $161,462. The fair value assigned to these options exercised of $26,526 has been transferred to share capital from contributed surplus.

v. In June 2006 the company completed a private placement of 1,241,166 flow-through common shares at $3.75 per share, for gross proceeds of $4,654,373.

vi. In December 2006 the company completed various private placements of 58,000 common shares at price of $2.25 per share along with 29,000 warrants for the purchase of one common share at price of $3.00 for proceeds of $130,500.

vii. In December 2006 the company completed a private placement of 1,751,973 flow-through common shares at $3.05 per share, for gross proceeds of $5,343,518.

d) Stock option plan:

The company has a stock option plan for the benefit of directors, officers, employees and consultants administered by the Board of Directors, in which up to 10% of the issued and outstanding common shares are reserved for issuance. Share options granted prior to February 2006 vested immediately while those granted subsequent to February 2006 vest 1/3 on each of the three anniversary dates from date of granting and have a term of five years.

A summary of the status of the stock option plan as of December 31, 2006 and December 31, 2005 and changes during the periods then ended is presented below:



December 31, 2006 December 31, 2005
-------------------- --------------------
Weighted Weighted
Average Average
Stock Exercise Stock Exercise
Options Price ($) Options Price ($)
-------------------- --------------------
Outstanding, beginning of period 748,470 0.96 492,500 0.75

Granted 595,500 2.54 320,970 1.25
Exercised (163,595) 0.99 (55,000) 0.77
Cancelled (185,000) - (10,000) 1.10
-------------------- --------------------

Outstanding, end of period 995,375 1.64 748,470 0.96
-------------------- --------------------
-------------------- --------------------
Exercisable, end of period 600,375 1.03 748,470 0.96
-------------------- --------------------
-------------------- --------------------


Weighted
average Weighted Weighted
remaining average average
Range of exercise Number contractual remaining Number remaining
prices outstanding life (years) price ($) exercisable price ($)
$0.50 185,000 2.3 0.50 185,000 0.50
$1.10 137,500 2.6 1.10 137,500 1.10
$1.25 240,000 3.7 1.25 240,000 1.25
$2.00 to $2.95 432,875 4.6 2.50 37,875 2.00
----------------------------------------------------------------------------
995,375 3.7 1.64 600,375 1.03
----------------------------------------------------------------------------


The company has recorded stock-based compensation expense of $137,872 (2005 - $125,280) for the year ended December 31, 2006. The compensation expense is determined based on the fair value of the options at the grant date.

The fair value of stock options has been estimated on the date of grant by reference to the Black-Scholes option-pricing model. For the year ended December 31, 2006, the company assumed that the life of all options granted equals 5 years, no dividends will be paid, average expected volatility of 99% and an average risk free interest rate of 5.5%.

e) Warrants

A summary of the status of the common share purchase warrants as of December 31, 2006 and December 31, 2005 and changes during the years then ended is presented below:




December 31, 2006 December 31, 2005
-------------------- --------------------
Weighted Weighted
Average Average
-------------------- --------------------
Exercise Exercise
Warrants Price ($) Warrants Price ($)
-------------------- --------------------

Outstanding, beginning of year - - 165,530 1.00

Issued 29,000 3.00 - -
Exercised - - (165,530) 1.00
-------------------- --------------------

Outstanding, end of year 29,000 3.00 - -
-------------------- --------------------
-------------------- --------------------

The warrants expire on December 29, 2008.


Note 7 - Related Party Transactions

The company had the following related party transaction during the year:

a) During the period the company incurred $82,500 in management fees to a company controlled by a director and officer of the company for services as President of the Company.

b) During the period the company incurred share issue costs of $69,007 and general legal fees of $25,690 from professional fees charged by a Director.

All related party transactions occurred in the normal course of operations, have been measured at the agreed to exchange amounts, which is the amount of consideration established and agreed to by the related parties.



Note 8 - Commitments

At December 31, 2006 the company had lease commitments related to buildings
and vehicles totaling $844,010 payable as follows:

$
2007 195,486
2008 181,810
2009 154,686
2010 144,511
2011 143,586
Thereafter 23,931
----------------------------------------------------------------------------
844,010
----------------------------------------------------------------------------


The company had entered into a consulting agreement with a corporation controlled by a Director and Officer of the company to provide services as President of the company. The company was committed to pay a management fee of $7,500 per month expiring in March 2009. Subsequent to year-end, this agreement was terminated as the Director and Officer became an employee of the company with the position of President.

During the year, the company committed to spending $3,643,518 on expenditures qualifying as Canadian exploration expenditures before December 31, 2007. Flow-through expenditures on Canadian exploration expenses were renounced to subscribers of the flow-through common shares in February 2007 effective December 31, 2006. The related income tax impact will be recorded in the first quarter of 2007.

Note 9 - Income Taxes

The company's income tax expense differs from the statutory rate as follows:



2006 2005
$ $
Income (loss) before tax (1,268,076) (566,289)
----------------------------------------------------------------------------
Combined basic Canadian Federal and Provincial
income tax provision at statutory rates (33.62%) (437,359) (190,386)
Non-deductible items 102,815 47,000
Resource allowance 25,608 18,000
Change in valuation allowance - 150,386
Rate adjustment and other (78,454) (25,000)
----------------------------------------------------------------------------
(387,390) -
----------------------------------------------------------------------------

The significant components of future income tax assets and liabilities are
summarized as follows:

2006 2005
$ $
Share issuance costs 223,298 217,000
Asset retirement obligation 128,154 69,000
Property, plant and equipment (2,123,629) (569,000)
Non-capital loss carryforward, net of valuation
allowance 39,564 -
----------------------------------------------------------------------------
(1,732,613) (283,000)
----------------------------------------------------------------------------


Note 10 - Earnings per common share

The weighted average number of common shares outstanding during the year was 10,969,389 (2005 -- 5,935,049). Using the treasury method of calculating diluted earnings per share, the potential common shares outstanding during the year was 11,379,685 (2005 -- 5,974,981). Potential common shares consist of common shares issuable upon the exercise of stock options and warrants, but are excluded from the calculation if their effect is anti-dilutive.

Note 11 - Acquisition and Amalgamation of Primax Capital Corp.

Primax Capital Corp. ("Primax") was acquired by the company on March 21, 2006 in order to facilitate the conversion to a publicly listed company. 505,000 shares and 50,500 options of the company were issued in return for 100% of outstanding capital of Primax. On acquisition and amalgamation, Primax had cash on hand of $669,808 and other assets valued at $30,322.

Note 12 - Financial Instruments

a) Fair values

The company's financial instruments recognized in the balance sheet consist of cash and cash equivalents and accounts receivable, accounts payable, bank debt and accrued liabilities. The carrying value of these accounts approximates their fair value due to the relatively short periods to maturity of these instruments.

b) Commodity price risk

The company's operations are at risk to commodity price fluctuations for the delivery of natural gas and crude oil. The company has not entered into any hedging arrangements.

c) Credit risk

Substantially all the company's accounts receivable are with customers and joint venture partners in the oil and gas industry and are subject to normal industry credit risks.

Note 13 - Subsequent events

On April 17, 2007, the company closed on the private placement of 1,463,400 common shares issued on a flow through basis for $2.05 per share for total proceeds of $2,999,969.

ADVISORY: Natural gas volumes have been converted to barrels ("bbl") of oil equivalent ("boe") using six thousand cubic feet ("mcf") of natural gas equal to one boe. This conversion conforms to NI51-101. Use of the term boe may be misleading, particularly if used in isolation. A boe conversion ration of 6 mcf to 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Certain information in this news release, including management's assessment of future plans and operations, number of locations in drilling inventory and wells to be drilled, timing of drilling and tie-in of wells, productive capacity of the new wells and productive capacity from different wells, costs, timing and other matters, may constitute forward-looking statements under applicable securities laws. Such forward looking statements necessarily involve risks including, without limitation, risks associated with oil and gas exploration, development, exploitation, production, marketing and transportation, wells not performing as expected. Readers are cautioned that the foregoing list of factors is not exhaustive. Additional information on these and other factors that could effect Fair Sky's operations and financial results are included in reports on file with Canadian securities regulatory authorities and may be accessed through the SEDAR website at www.sedar.com. The forward-looking statements contained in this news release are made as at the date of this news release and Fair Sky does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required by applicable securities laws.

The TSX Venture Exchange Inc. has not reviewed and does not accept responsibility for the adequacy or accuracy of this release.

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